Market Outlook - July 2024

In the last week of July markets around the world experienced some increased volatility as investors reacted to the latest growth concerns driven by weak payrolls, which caused widespread selling. The selling was exacerbated after the Bank of Japan hinted at rate increases which sent panic and a massive unwinding of the “carry trade” which is where investors had borrowed in Japanese yen at low interest rates to purchase U.S. growth stocks and profit from the spread. In the West, the Fed pushed back against the recent ramp-up in hard-landing concerns. While in the East, Japanese officials tried to contain the selloff with the Prime Minister urging calm and senior finance officials holding an emergency meeting and stressing coordination between government and the Bank of Japan.

From our perspective, while the BoJ has provided some relief by walking back on the talk of rate increases, we would expect the carry trade unwind to continue, albeit at a slower pace. In addition, that slow unwinding may prove to be an overhang on the markets for the next couple of months. On the economic front, the latest consumer commentary sanguine with Simon Property Group noted strong demand for retail space and points out a benign inflation outlook which should ease pressure on lower-end consumers. In a recent Goldman Sachs report it was highlighted that a pickup in corporate buyback activity would provide support for stocks and from a technical perspective the recent volatility has been more about forced unwinds than any major shift in sentiment, noting little panic seen amongst institutional flows.

This gives us confidence that recent headline news is yet again no more than noise and trading activity is confirmation of our outlook earlier this year that in the second half investors will reposition portfolios, taking profits from mega cap tech related stocks and repositioning funds to undervalued areas of the market.

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